Wednesday, October 7, 2015

Is Deutsche Bank the Next Lehman Brothers?

Today, Deutsche Bank announced some $7 billion loss for it's 3rd quarter and announced that their dividend will likely be suspended.  In June, the bank had their debt downgraded to BBB+ or just 3 notches above junk.

There is some concern that DB is the next Lehman. Maybe it's worse!  Lehman's credit rating was AA- at the time it was beginning to circle down the drain.  It's fall was very quick. In June 9, 2008, Lehman's credit rating was reduced to AA- minus with negative outlook.  Just 3 months later, Lehman declared bankruptcy and shook the entire foundation of the world's finances. Could we be 3 months from another such event?

The 2nd Great Depression was beginning with the Lehman bankruptcy but was ultimately halted or delayed by eliminating "mark-to-market" accounting for banks. This allowed banks to basically lie about their financial condition. This state of affairs continues to this day. Uncertainty about bank's financial conditions could therefore begin again.  It might have already started as the TED spread is rising recently (a measure of interbank lending rate relative to treasury bills).

From ZeroHedge, here's a chronology of the events at DB during the past 15 months that is very worrisome:
  • In April of 2014, Deutsche Bank was forced to raise an additional 1.5 Billion of Tier 1 capital to support it’s capital structure. Why?
  • 1 month later in May of 2014, the scramble for liquidity continued as DB announced the selling of8 billion euros worth of stock – at up to a 30% discount. Why again? It was a move which raised eyebrows across the financial media. The calm outward image of Deutsche Bank did not seem to reflect their rushed efforts to raise liquidity. Something was decidedly rotten behind the curtain.
  • Fast forwarding to March of this year: Deutsche Bank fails the banking industry’s “stress tests” and is given a stern warning to shore up it’s capital structure.
  • In April, Deutsche Bank confirms it’s agreement to a joint settlement with the US and UK regarding the manipulation of LIBOR. The bank is saddled with a massive $2.1 billion payment to the DOJ. (Still, a small fraction of their winnings from the crime).
  • In May, one of Deutsche Bank’s CEOs, Anshu Jain is given an enormous amount of new authorityby the board of directors. We guess that this is a “crisis move”. In times of crisis the power of the executive is often increased.
  • June 5: Greece misses it’s payment to the IMF. The risk of default across all of it’s debt is now considered acute. This has massive implications for Deutsche Bank.
  • June 6/7: (A Saturday/Sunday, and immediately following Greece’s missed payment to the IMF) Deutsche Bank’s two CEO’s announce their surprise departure from the company. (Just one month after Jain is given his new expanded powers). Anshu Jain will step down first at the end of June. Jürgen Fitschen will step down next May.
  • June 9: S&P lowers the rating of Deutsche Bank to BBB+ Just three notches above “junk”. (Incidentally, BBB+ is even lower than Lehman’s downgrade – which preceded it’s collapse by just 3 months)"

Scary, huh?  Was the 2nd Great Depression just delayed?

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